Asia File Corp Bhd
(Sept 3, RM2.64)
Downgrade to sell with a lower target price of RM2.21: Asia File Corp Bhd’s earnings for first quarter of financial year 2019 (1QFY19) fell below our expectations. Asia File reported a sluggish 1QFY19 net profit of RM8 million, a 44% decline year-on-year (y-o-y) and 29% decline quarter-on-quarter (q-o-q), which made up only 15% of our full-year estimates. Its margins were weaker with earnings before interest, taxes, depreciation and amortisation and net profit margins at 12.3% and 9.5% compared with 19.4% and 15.6% for 1QFY18, respectively. Its revenue, however, was in line at RM84.1 million, a decline of 7.5% y-o-y and a growth of 0.4% q-o-q, at 23% of our full-year estimates. The variance was due to higher raw material costs, particularly as a result of higher pulp prices of roughly 30% y-o-y and 8% q-o-q.
Asia File’s profit contribution from associate (Muda Holdings) was higher y-o-y at RM2.4 million, more than 100% growth y-o-y in 1QFY19 on higher sales volume from paper packaging products and better average selling prices (ASPs) of industrial paper products. That said, profit contribution dropped 29% q-o-q due to lower ASPs for its trading division. 1QFY19 associate profit contribution accounted for only 17% of our full-year estimates.
We cut our FY19/FY20/FY21 earnings estimates by 30%/26%/23% to reflect the uptrend in pulp price. The group soft launched its new disposable food ware products in first quarter of calendar year 2018. This might increase its depreciation cost and raw material consumption, but we think the impact will not be significant as management has only so far spent less than RM11 million capital expenditure on this segment. The production rate is still at an infant stage as management is still assessing the market situation. — Maybank IB Research, Sept 3